Problem 12-21 Dropping or Retaining a Flight [LO12-2] Profits have been decreasi
ID: 2529116 • Letter: P
Question
Problem 12-21 Dropping or Retaining a Flight [LO12-2] Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows Ticket revenue (110 seats 40% $2,640 484 occupancy x $60 ticket price) 100% 18.3 Variable expenses ($11.00 per person) Contribution margin Flight expenses 2156 81.7% Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight $ 340 720 490 175 180 720 180 preparation Overnight costs for flight crew and assistants at destination 50 2,855 $(699) Total flight expenses Net operating loss The following additional information is available about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete. b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decision to drop flight 482.Explanation / Answer
Contribution margin lost if tour is discontinued -2156 Less :Flight costs that can be avoided if the flight is discontinued Flight pramotion 720 fuel for aircraft 175 Liability Insurance (180*1/3) 60 Slaaries,Flight assistants 720 Overnight cost for flight crew and assistants 50 1725 Net increase(decrease) in profits if the flight is discontinued -431 Explanation The following costs are not relavent for decision Salaries , flight crew Fixed annual salaries which will not change Depriciation of air craft Sunk cost Liability insurance 2/3rd Uneffected by this decision Bagage lloading and flight preparation This is an allocated cost which will continue even if the flight is discontinued